Transcript of a Press Briefing by
Alessandro Leipold, Senior Advisor in European I Department and Luc Everaert, Deputy Division Chief, European I Department
International Monetary Fund
Monday, November 5, 2001
Washington, D.C.

MR. LEIPOLD: I'm Alessandro Leipold, Senior Advisor in European I Department. I led the French mission this year, last year as well, actually. And to my left is Luc Everaert, who is the Deputy Division Chief in the division that covers France.

I think I'll start just trying to show you a little bit your way through this unwieldy set of documents here.

The main document, obviously, is the staff report, which is the very first one at the beginning there. The main thing I'd point out about that, that even though it's dated September 20th, what you want to bear in mind is the last bullet point on the first page of that, which says that the report was finalized prior to the September 11 attacks. And so it does not reflect an assessment following those attacks.

In particular, if you want to go toward the end of that report, there is a Table 1 on page 34 of the staff report. The forecasts in that table are pre-September 11th for 2001, in particular for 2002.

The report was then followed as a sort of traditional--also because of the timing of the budget in France, we usually sort of issue the report before we have the budget, and the Board meeting takes place after the budget. It was followed by a supplement which you then need to go a bit further down, and you will find a staff report supplementary information, quite a bit further down.

Just to illustrate very quickly, if you want, on the growth outlook, for example, prior to--in the staff report, as I said, prior to September 11 attacks, we were forecasting 2.1 percent growth for France next year, GDP growth. In the supplement, in paragraph 3 of that supplement, you will see that we say average growth would be around half a percentage point below the staff report's projection. We didn't want to be too precise because we're still in the middle of the WEO round. But basically, like anybody could calculate, that means 1.6, around that, is our forecast for next year.

That's one big difference, obviously, and it plays through the components of growth. The other big difference with respect to the forecasts for 2002 as between the staff report and our more updated forecast is for the general government balance, or deficit, which in the staff report next year was a deficit of 1.6 percent. And in the supplement, we have a number in the order of 2 percent deficit for next year.

I'll recall just that originally the government in its stability plan, which was based on much stronger growth, was targeting a deficit of only 0.6 next year, and in its budget, which it presented in October formally to the national assembly, it is targeting 1.4. We are, as I say, around 2 percent.

Just to finish and by way of illustrating the actual documentation, and then perhaps I can try to sum up some of the main points, right toward the end you have what we call the PIN, the Public Information Notice, with obviously in its second part the Executive Board assessment, and that's perhaps what I will take you through quickly and make some points on.

The other papers I dare say may be of less immediate interest to journalists, but one is a study on the role of wage moderation in labor market developments in France where we find that a lot of the explanation for France is relatively favorable labor market performance, and the latest upswing is due to a protracted period of wage moderation that's been observed in France. And the others are updates of previous ROSCs on transparency, fiscal and monetary transparency, and finally an assessment of the compliance by France with the Basle core principles, which is the big thick document, that basically finds France to be compliant with most of the principles.

Let me just take you perhaps, if I may, quickly through the main points of the Board's assessment, which are, as I say, in the PIN, which is really the last three or four pages of the first set of documents you received.

There's no doubt that France has done relatively well. I mean, it has had a number of years of pretty strong growth, low inflation, declining unemployment, particularly, I mean, by its historical experience, particularly job-rich growth. And the reasons for that are certainly in that a number of measures have been taken over the past years that have improved the economy's structural performance.

The main point from the first paragraph, if you want, of the Executive Board assessment is a bit that sense. They have done well. They have done a number of measures that have helped them do well, but in the final sentence, there is a phrase that says going forward there are serious challenges remaining to lift labor force participation, lower structural unemployment, and further reducing the tax burden. And that is a bit a theme in a sense of where France is.

If you look at the staff report itself--and I'm sorry it's a bit difficult to find everything, but at the beginning of the document on page 5, the main report, right at the beginning, there is a little table of selected economic indicators. It's in paragraph 4 of the main report, page 5, which is meant to illustrate that although things have improved and France is, as I say structurally stronger, its starting position was actually so weak in a number of ways that it still is not a star performer. Unemployment is high relative to the euro area or certainly the year average. Labor force participation among elderly workers is particularly low, and--we didn't include a column here on youth, but it would show a similar pattern.

The structural deficit of the government account is still high relative to the rest of the euro area, and the government is large. As you can see, revenues to GDP are 52 percent, and basically it has a very large civil service. We could have had other columns to illustrate that the size of government is still very large. So an economy that's done well, but that structurally still has a way to go. That is a little bit the sense of the first paragraph of the Executive Board's assessment.

If you want, on growth, quickly, I think the Board basically agreed with staff that prospects for next year have weakened considerably. I don't think anybody really wants to put their name to a specific number at this point. The authorities are certainly more optimistic than the staff. Their budget is based on growth of 2.5 percent. I think they recognize that is now optimistic, or they explicitly have said so, but have not officially revised it down yet from 2.5, even though 2.25 seems to be the number that they have in mind. As I say, we have 1.6 percent growth.

On the fiscal, which is on top of page 3 of the Board's assessment, of the PIN, the main thing that I think needs to be highlighted is that France really did not achieve much in the way of structural progress, of improving its structural balance during the upswing. They had years of very strong growth since accession to EMU in '97, but the structural balances remain virtually unchanged at around 1 percent of GDP deficit, which now makes it all that much harder to get to the target of a structural equilibrium or balance of zero deficit in structural terms in 2004, which is France's objective and it's Germany's objective. It is more or less the objective in a sense in a Stability and Growth Pact, even though not explicitly. The year 2004 obviously is not mentioned there, but the main countries have set themselves the objective of achieving that by 2004.

With the fact that during the upswing they did not improve it very much, it does make it difficult for 2004, given also that next year the budget does imply some fiscal easing.

In the Board there is a usual call for reforms in key sectors, and that would be necessary, in fact, to contain expenditure growth in a way that should allow them to achieve the fiscal deficit target of balance, structural balance by 2004, the main things being the civil service--I mentioned before its large size--health care, where spending always exceeds budgeted amounts, and the usual one, pensions. Of course, as you know, there's elections in France next year, and action on any of these is not going to take place until after the elections.

There's a passage after that in the Board's assessment regarding France's medium-term fiscal framework and how that can be strengthened, and I'll be happy to answer questions on that if there are any.

And, finally, there is part on product market, on both labor markets, where we have less really pressing perhaps advice to give the French as, say, compared to the Germans because, as I say, their labor market has done relatively well and they have taken a number of measures. Where we feel that more certainly needs to be done in France is in product market liberalization, the opening up of the energy sector and the fact that the authorities steadfastly refused to commit to specific timetables in both the energy and transportation sectors in terms of opening up.

Finally, on the financial sector, I think we don't have particular concerns about developments in the financial sector, but we and Directors certainly felt that the presence of administered interest rates in a large part there are very important savings instruments where rates are still set by the government in essence, by a public committee, is sort of an anachronism that France should get rid of. And even though there has been a large amount of privatization and most major commercial banks have been privatized, there is still a public presence in the banking sector that we feel ought to be scaled back.

Those are the main points. I'm sorry if I took up some of the time, but I think it's useful to sort of find one's way among all these documents. I'll be happy to answer any questions.

QUESTIONER: Could you just walk us through about the revision to growth for next year to 1.6? Obviously there are going to be effects on the European economy from what's happened in the U.S. in September, but how do those effects ripple through in this case to France? And what caused the half-point reduction?

MR. LEIPOLD: Yes, Luc may want to add a point or two there. Some of the reasoning is set out in paragraph 2 of the supplement. We also have, if you look at the supplement, there's a set of charts on this which look like this here in page 5 in the supplement, which is sort of high frequency indicators that tell us, hopefully tell us what may lie in store. And as you can see, in terms of business confidence, consumer confidence, industrial orders--industrial production has held up relatively well, but industrial orders, which is a good, forward-looking indicator, and unemployment expectations, those first four panels, they certainly point to a relatively bleak situation, even pre-September 11th. So there was an underlying weakness in--developing in the economy, a slowdown developing in the economy prior to September 11th.

What the effects of September 11 will be on Europe, you know, is difficult to gauge. We have generally thought that there would certainly be further negative confidence effects that would play through. There is, of course, the external channel and exports and world growth in general. And there is, if you want, the financial channel of shocks to stock markets or the IT shock, et cetera.

We really for Europe as whole, and as for the U.S.--but as you know, we're still in the middle of a new WEO--this thinking is still of a relatively short-lived slowdown with a pickup in the second half of 2002, with the thought there that there's considerable stimulus that is in store in the U.S., in particular, will help lift demand. In Europe there is less of such stimulus in the pipeline, but in France, in particular, there are a number of measures in there mentioned in the supplement that the authorities have taken. They will bring forward the payment of an income tax credit, for example. And the general expectation is--and we shall see this week--certainly it's built into our forecast that there will be further ECB easing.

So all of these things brought together lower oil prices as well, you know, barring further shocks in a very extended conflict, should make for a pickup in the second half. That's what the 1.6 comes from. The 1.6 comes from a very weak fourth quarter in 2001, so very little sort of carryover of growth into 2002, still a relatively weak first quarter, and then--of 2002, and then a gradual pick up, in fact, to growth rates of around potential growth or even slightly above potential growth for France, which we put at--what is our potential for France, two and a half or so?

MR. EVERAERT: Two and a half.

MR. LEIPOLD: In the third and fourth quarters. I don't know, Luc, if there's anything you'd like to add.

MR. EVERAERT: Just a little bit on one point on the composition. The question was about how the difference between the 2.1 we had before translated into 1.6, and Alessandro mentioned the channels. The way this has been implemented in our forecast is that we have a weakening of investment because of the global environment that is--first of all, was weaker before the attacks, but that uncertainty, of course, has added to that. And, therefore, our forecast now has a decline in business investment in the last quarter of 2001, which is one of the main elements.

The other element is a slight weakening in the foreign balance, that's the channel from the U.S. economy which is coming through, and then finally we also have private consumption weaker in the fourth quarter and the first quarter of next year, reflecting both a little bit the increase in unemployment in France, but also the direct effect of uncertainty on the consumer. But as Alessandro said, this is very uncertain. It's very difficult to forecast confidence effects on that side.

QUESTIONER: There is something which makes specific the impact of the 11th of September on France, or can we assume that similar impact will be on other European economies, about a half-percent cut in the growth forecast for other European economies?

MR. LEIPOLD: That's a sort of ballpark number, yes. But we tried to look at specificities in each country which would make for slight variations around--by decimal points, probably around that number.

QUESTIONER: In terms of the labor area, you're saying that France has probably done more than some of the other EU countries to address its labor market. And yet it still seems to have the same problems after these reforms, and the unemployment rate is still fairly high, the participation rate, the employment rate for the older and the younger. What next? What should they be looking at? And, you know, have the reforms that they have put in place had any real net effect on the economy at all?

MR. LEIPOLD: Yes, they have. I mean, and it's documented in the main staff report in terms of the intensity of unemployment growth. And the reverse of that is, in fact, now also that unemployment is going up relatively quickly because the market is more flexible, especially in forms of contracts like temporary--temps and fixed-term type contracts.

You know, we don't have the counterfactual, but the situation would certainly, I think, have definitely been worse without those reforms.

What next, what more should they do is not that easy to say because I think they may--they can still do things--the emphasis on France has been mainly on the demand side of labor initially, i.e., to increase enterprises' demand for labor, or at least supported essentially through cuts in social security contributions for lower-skilled workers, partly itself necessary because of the workings of the minimum wage. So to offset that effect on labor costs, the government reduced social security taxes on the low-paid. That certainly worked.

Then on the supply side, for some time there wasn't much attention, i.e., by that I mean what are the disincentives for people to offer--to decide to go to work, for those who are idle to decide to go to work. Given various support mechanisms, given various minimum income support type schemes, there were various cases in which you basically had what we call unemployment traps or poverty traps where people--there was no inducement to return to work because of high marginal taxation from shifting from being unemployed to being employed.

They've looked at that increasingly. It's difficult to know whether they've addressed them all. There's probably still a number of them out there, a number of things they could do, but they've certainly been trying to address that side of the equation as well.

We're a little worried about some changes that they've made to the unemployment benefits scheme in the recent past, where on paper, at least, it's a very good idea. It was supposed to encourage a sort of job search, active job search, i.e., in other words, an employment agency was supposed to help individuals actively seek work.

The problem is that there is no real explicit sanction for not doing so, and in the meantime, they've done away with the tapering of unemployment benefits, plus previously the unemployment benefits became less and less as time wore on, so you had, if you want the financial incentive to seek work, that is no longer there. It's accompanied by this attempt at job placement, which, if it works, is fine; but if it doesn't, it could mean that people just stay on the dole for longer. That is one issue.

The other issue which the press has actually paid a good deal of attention to, especially in France, are proposals to tighten dismissal rules that are pending before parliament, which are not a good idea either in the present circumstances. Fifty entrepreneurs, of course, recently wrote the Prime Minister putting forth their own view, which is obviously very much against this.

Our assessment is that perhaps the actual impact of these in practice may not be that significant. It would simply prolong procedures, make it a little bit more difficult. It's not as if people will not be laid off in the end, but it will render it more bureaucratic and more difficult and may affect some investment decisions or hiring decisions in the future.

So I think that to guard against doing anything silly--and, of course, that could happen in a climate where there are a lot of announcements of layoffs--continue to look at what they could do on the supply side.

As I said, we're in the midst of a WEO exercise, so some of these numbers are pretty tentative. But we would have unemployment going up. That's not surprising. It does depend now--there's some confusion, of course--if I cite any ratios, there's a lot of confusion because the definitions are changing. INSEE itself is reviewing--so I don't know what definition you would want to use, Luc-

MR. EVERAERT: Let's work in maybe sort of a relative increased term so that we're not stuck with a particularly level definition. You know that today the official unemployment rate is 9 percent, and in our average forecast for 2001, which we still hold, this would be 8.7 percent. But that's the average for the year as a whole. It was lower, as you know, in May and June, and that's why the average is lower.

I think we're looking at an increase of about point-four percentage points for next year--no, point-four, zero-point-four. So the rate will go up. If it's 9 today, it would be 9.4 or 9.5 a year from now. And on average it would also go up by a similar amount, the average for next year.

MR. LEIPOLD: So that would be 8.7 to 9.1?

MR. EVERAERT: That would be 9.1 in our definition, but as I said, definitions are being adjusted so we need to be careful when we talk about levels, because if you say today 9.1 and the actual rate is 9 but it's a different definition, that doesn't seem like a whole lot. So the comparable number would be from 8.7 to 9.1.

[Inaudible question off microphone.]

MR. LEIPOLD: You mean in numbers of thousands of people of job losses? Not really, no. I mean, I would need to work it out. I can provide you some more quantitative information, but I don't have that here.

QUESTIONER: I had a question about inflation. I'm sorry, maybe it's already in the table, but because I see here that you're expecting inflation to fall appreciably in 2002. What's the forecast for that?

MR. LEIPOLD: A number of around 1 percent.

QUESTIONER: You mean compared with the 1.6 percent of [inaudible]?

MR. LEIPOLD: Yes, that's right, which leads us actually to another point that is perhaps of interest that I should highlight.

QUESTIONER: Do you expect it to fall by 1 percent--
MR. LEIPOLD: No, to go to 1 percent. The fall would be about half a percentage point. On average.

MR. EVERAERT: Yes, on average. It's from 1.8-

MR. LEIPOLD: Yes, the average for this year is 1.8, and we expect it to go to perhaps slightly above 1--1 to 1.1 next year.

QUESTIONER: What do you mean by inflation?

MR. LEIPOLD: Consumer price index.
The government in its budget, as your colleague pointed out, has 1.6; 1.6 currently appears a little high to use because 1.6 is what it is now at present, and as there's reason to believe it will come down, which makes a difference a little bit also in the assessment. If you look at the supplement, paragraph 4, the supplement being, again, one of the final last documents there, there's a little table that says general government real expenditure growth. The stability program for France for 2002 had a real expenditure growth target of 1.6. The budget now has on the authorities' inflation assumption--and this is a recognized number--is 2.2 real growth.

On our inflation numbers, it would obviously be higher given that we have considerably lower inflation. So that the budget for 2002 exceeds the norm for real expenditure growth as laid down by the stability program by a considerable amount in terms of real expenditure growth.

The authorities do point out that the stability program numbers should not be understood as particularly binding for any given year. It's the cumulative three-year growth that they are aiming for. But, of course, if it's going to be 2.2 or more in 2002 in real terms, that leaves very little margin for 2003, 2004, if indeed they want to remain within the cumulative three-year growth of which is 4.5. It's supposed to be 1.5 percent more or less on average real expenditure growth per annum, 4.5 for the three years 2002 to 2004. If you're eating up half or even more than half of that 4.5 in your first year, that leaves you a pretty tough task for the two remaining years, and that's why we have some concern as to whether the objective of structural balance by 2004 will be stuck to. At the end of this year, the authorities will be presenting a new stability plan covering the years 2003 to 2005. And a concern expressed by the Board by Directors was that in elaborating that plan, the target of structural balance by 2004 should not be moved further into the future. But we shall see.

QUESTIONER: You revised the inflation numbers from which initial number?

MR. LEIPOLD: There was no big revision.

MR. EVERAERT: The initial number was 1.1. We still have about that number. It hasn't been revised.

QUESTIONER: From 1 to 1.1.

MR. EVERAERT: Yes. I think if I look at the last forecast, it's still 1.1 if you round it up.

QUESTIONER: I was just wondering, you said that you've built into your forecast some further easing by the ECB. How much further easing have you built in?

MR. LEIPOLD: Basically we don't try to guess interest rates. We take what futures markets tell us, and the market expectations were for a further 50-basis-point cut, and that's the assumption underlying the WEO.

QUESTIONER: In what timeframe?

MR. LEIPOLD: Within the next six months or something like that.

MR. EVERAERT: At the time of the projections.

MR. LEIPOLD: At the time of the projections, yes. It may take place earlier. We shall see.

QUESTION: When was the Board approval?

MR. LEIPOLD: I should say, just for clarification, the Board as such does not approve the paper. It discusses it. It was discussed on--when was it? October 26th, right, as it says on the cover note there.

MS. LOTZE: All right. Thank you very much for coming.
[Whereupon, the press briefing was concluded.]